Analysis Grains
Trade war clouds outlook on grain market
The effect of the trade war unleashed by Donald Trump was clearly noticeable on the grain market yesterday. Wheat, corn, and soybeans all took a significant hit. American exporters are particularly concerned about the consequences for corn and soybeans, which surprisingly were not the biggest decliners. Some experts believe that if the market recovers, wheat could lead the way.
The March wheat contract on the Matif closed €1.25 lower at €216.25 per ton yesterday. On the CBoT, wheat closed 2.5% lower at $5.18½ per bushel. Corn also took a step back, dropping 1% to $4.36 per bushel. Soybeans were not spared and showed a 1.4% decline to close at $9.84 per bushel.
The implementation of trade tariffs by Donald Trump and the reactions from Canada, China, and Mexico kept tensions high in the grain market. For corn, the concern lies mainly in the trade relationship with Mexico. There had been considerable debate between the US and Mexico regarding the acceptance of GMO corn from the US. This issue has finally been resolved, and Mexico has secured a record amount of American corn, totaling 17.2 million tons, by mid-February. This represents 70% of the USDA's export expectations to Mexico.
With soybeans, it is mainly China that is making American exporters nervous. Beijing announced a 10% tariff on American soybeans. Interestingly, soybeans are more important for American exports than corn and wheat, yet China imposed a 15% tariff on the latter two.
Cold Followed by Drought
If tensions ease after the initial blow in the trade war, the recovery within the grain complex could potentially come from wheat. Winter wheat in the US and Russia has been affected by frost. The exact extent of the frost damage is still unclear. With the cold barely behind them, American and Russian wheat growers are already facing the next challenge. Weather forecasts for the (northern) US prairies and the southwestern wheat belt in Russia indicate little to no rain. Particularly in Russia, where wheat was already moderately developed after a dry autumn and winter, analysts predict significant reductions in yield forecasts.
Removing Import Tariffs
Indian flour mills have urged the government to abolish the 40% import tariff on wheat. The wheat stock in India is depleting rapidly, and the retail price for wheat is about 8% higher in early March compared to a year earlier. To calm the market, the import tariff must be eliminated or at least reduced to below 10%. To avoid upsetting Indian farmers, the flour mills' lobby suggests adjusting the tariff only around June. By then, farmers typically have sold most of their wheat harvest, either through the government's intervention system or to commercial traders.
Above-average temperatures in India are raising concerns about the upcoming wheat harvest. Any yield shortfall undermines the Indian government's efforts to lower wheat prices in the domestic market. According to the USDA, India's wheat stock is the smallest in 16 years. Flour mills are counting on an Indian wheat harvest of 110 million tons, which is four million tons more than last year. This higher yield is mainly due to an expansion of wheat acreage in the country.
